USDA buyers stuck in limbo as shutdown hurts housing

“The last thing we need is anything that shakes the confidence in a softly recovering housing market,” David Stevens, chief executive officer of the Mortgage Bankers Association and former head of the FHA, said in a telephone interview last week.

Home prices, which have climbed 21% nationally since hitting a post-recession low in March 2012, are still 21% below their June 2006 peak, according to the S&P/Case-Shiller index of property values in 20 cities.

The damage to housing and financial firms will grow more severe the longer the shutdown lasts, Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC’s Washington Research Group, said in a research note today. What could have been “a minor speed bump if it only lasted for a few days is rapidly becoming an economic threat,” he said.

An index of homebuilder shares has dropped 2.9% this month and is down 24% from a peak in May.

If the shutdown continues for more than two weeks, it will begin to “have an immense adverse impact,” on the economies of rural communities, according to a USDA September report detailing contingency plans for a shutdown. Fifteen percent of the nation’s population, or 46.2 million people, live in rural counties that account for 72% of the U.S. land base, according to a May report from the USDA.

Void Filled

The USDA’s Rural Housing Services that administers the mortgages has its roots in the Great Depression in the 1930s, when it was established to aid farming communities including central areas devastated by drought that became known as the Dust Bowl. After the subprime mortgage collapse of the last decade, the program filled a void in lending products for first-time buyers.

The zero-down payment mortgages are for borrowers with incomes of as much as 115% of an area’s median pay. USDA borrowers pay an upfront fee equal to 2% of the borrowed amount and an annual insurance fee of 0.4%.

Eligible Communities

In addition to farm states such as Iowa and Ohio, the agency’s definition of eligible communities includes areas in western Massachusetts, New York’s Long Island, and other places that residents may not consider rural. The program extends to towns and cities with populations of up to 25,000 that the agency designates as “rural” if they are not suburbs and if their loans are used to purchase homes that are “modest in design, size and cost,” according to the Office of the Comptroller of the Currency.

About 6% of mortgages last year were USDA loans in Louisiana, Wyoming and Arkansas, the states with the largest shares, according to the Mortgage Bankers Association.

The loans account for about 1% of the Florida market, according to the Mortgage Bankers Association. Their use is more concentrated in areas of central Florida, said Rob Nunziata, co-Chief Executive Officer of FBC Mortgage LLC in Orlando.